By the end of an accounting period, there's a lot to juggle at once: the trial balance, a list of adjustments that still need to be made, and two financial statements waiting to be built. A work sheet is a form that organizes the account data required for the preparation of financial statements — it's an internal working paper, never shown to external users, that keeps all of that juggling in one place and helps catch errors before the real statements are written.
The Six-Column Layout
- Trial Balance columns (Dr/Cr) — every ledger account and its balance is copied in first, exactly as it appears in the ledger.
- Income Statement columns (Dr/Cr) — every revenue and expense account's balance is extended (copied across) into these columns.
- Balance Sheet columns (Dr/Cr) — every asset, liability, and owner's equity account's balance is extended into these columns.
Extending Balances
"Extending" a balance just means copying it sideways from the Trial Balance section into the correct later section, based on the account's type. Revenue and Expense accounts always extend into the Income Statement columns. Asset, Liability, and Owner's Equity (including Drawings) accounts always extend into the Balance Sheet columns.
Calculating Net Income on the Work Sheet
Once every account has been extended, the Income Statement Debit column (expenses) and Credit column (revenue) are totalled. If the Credit total is bigger, the difference is net income; if the Debit total is bigger, the difference is a net loss. That same net income (or loss) figure is then added to the smaller side of the Balance Sheet columns as a balancing amount — which is exactly how net income flows into owner's equity, on paper, before it's formally recorded.
| Section | Debit total | Credit total | Difference |
|---|---|---|---|
| Income Statement | $4,950 (expenses) | $2,450 (revenue) | Net Loss $2,500 (Debit total is bigger) |
| Balance Sheet | before balancing | before balancing | Net Loss $2,500 is added to the Balance Sheet Debit column to balance it |